The Australian economy – The Australian economy – Staying afloat in the global stormStaying afloat in the global storm

David GruenDavid GruenTuesday, 26 May 2009Tuesday, 26 May 2009

Setting the scene:Setting the scene:Longer term trendsLonger term trends

Real GDP growthReal GDP growth

-3

-2

-1

0

1

2

3

4

5

6

1977-78 1982-83 1987-88 1992-93 1997-98 2002-03 2007-08 2012-13

-3

-2

-1

0

1

2

3

4

5

6Per cent Per cent

Forward estimates

Source: ABS Catalogue Number 5206.0 and Treasury.

Unemployment rateUnemployment rate

Source: ABS Catalogue Number 6202.0 and Treasury.

2

4

6

8

10

12

Jun-78 Jun-81 Jun-84 Jun-87 Jun-90 Jun-93 Jun-96 Jun-99 Jun-02 Jun-05 Jun-08 Jun-11

2

4

6

8

10

12Per cent Per cent

Fo

reca

sts

Employment shares by industryEmployment shares by industry

Source: ABS Catalogue Number 6291.0.55.003.

6

8

10

12

14

16

18

20

Feb-85 Feb-88 Feb-91 Feb-94 Feb-97 Feb-00 Feb-03 Feb-06 Feb-09

66

68

70

72

74

76

78

80

Manufacturing (LHS)

Mining and Construction (LHS)

Services (RHS)

Per cent Per cent

Participation ratesParticipation rates(Population aged 15 and over)(Population aged 15 and over)

40

50

60

70

80

90

Apr-79 Apr-84 Apr-89 Apr-94 Apr-99 Apr-04 Apr-09

40

50

60

70

80

90Per cent Per cent

Male

Female

Source: ABS Catalogue Number 6202.0.

Employment sharesEmployment shares

0

15

30

45

60

75

90

Apr-79 Apr-84 Apr-89 Apr-94 Apr-99 Apr-04 Apr-09

0

15

30

45

60

75

90Per cent Per cent

Full-time

Part-time

Source: ABS Catalogue Number 6202.0.

Exports and importsExports and imports(Values)(Values)

Source: ABS Catalogue Numbers 5206.0 and 5302.0.

11

14

17

20

23

26

29

Dec-78 Dec-84 Dec-90 Dec-96 Dec-02 Dec-0811

14

17

20

23

26

29

Imports

Exports

Per cent of GDP Per cent of GDP

Asia’s share of Australia’s Asia’s share of Australia’s merchandise imports and exportsmerchandise imports and exports

(Values)(Values)

Note: Asia defined as ASEAN, China, Japan, South Korea, Taiwan and Hong Kong.Source: ABS Catalogue Number 5368.0.

30

35

40

45

50

55

60

65

1989-90 1992-93 1995-96 1998-99 2001-02 2004-05 2007-08

30

35

40

45

50

55

60

65Per cent Per cent

Exports

Imports

Terms of tradeTerms of trade(Ratio of export prices to import prices)(Ratio of export prices to import prices)

Note: From September quarter 1959, quarterly data from ABS National Accounts, Catalogue Number 5302.0; prior to September quarter 1959, M W Butlin (1977) ‘A Preliminary Annual Database 1900-01 to 1973-74’, RBA Discussion Paper 7701. Source: ABS Catalogue Number 5302.0, Reserve Bank of Australia and Treasury.

40

60

80

100

120

140

160

1941 1964 1973 1982 1991 2001 2010

40

60

80

100

120

140

160

1950-51

Mar 1974

Sep 2008

Index (2006-07=100) Index (2006-07=100)

Mar 1989

(f)

Investment, savings and the current accountInvestment, savings and the current account

Source: ABS Catalogue Numbers 5206.0, 5302.0 and Treasury.

-10

0

10

20

30

40

1960-61 1970-71 1980-81 1990-91 2000-01 2010-11

-10

0

10

20

30

40

Current account balance

Gross savings

Gross investment

(f)

Per cent of GDP Per cent of GDP

Foreign liabilities and assetsForeign liabilities and assets

Source: ABS Catalogue Numbers 5206.0 and 5302.0.

0

50

100

150

200

Dec-88 Jun-91 Dec-93 Jun-96 Dec-98 Jun-01 Dec-03 Jun-06 Dec-08

0

50

100

150

200

Gross foreign liabilities

Gross foreign assets

Per cent of GDP Per cent of GDP

Net foreign liabilities

Net foreign debt

Household debt and assetsHousehold debt and assets

Source: ABS Catalogue Number 5232.0, Reserve Bank of Australia and Treasury.

0

40

80

120

160

200

Dec-89 Sep-94 Jun-99 Mar-04 Dec-08

0

200

400

600

800

1000Per centPer cent

Debt-to-income ratio (LHS)(Households only)

Assets-to-income ratio (RHS)

Net wealth-to-incomeratio (RHS)

Global financial crisisGlobal financial crisis

Causes of the global financial crisisCauses of the global financial crisis

Proximate causes in the US:Proximate causes in the US:

Long-term public sponsorship of home ownership for Long-term public sponsorship of home ownership for groups that could not afford itgroups that could not afford it

Incoherent financial regulation in the mortgage marketIncoherent financial regulation in the mortgage market

‘‘Originate to distribute’ model for mortgagesOriginate to distribute’ model for mortgages

– Mortgages bundled up and ‘securitised’Mortgages bundled up and ‘securitised’

– Given inappropriate AAA credit ratings and sold to final Given inappropriate AAA credit ratings and sold to final investorsinvestors

Risk was supposed to be spread to those most able to Risk was supposed to be spread to those most able to bear itbear it

In fact, it was spread to those least able to understand itIn fact, it was spread to those least able to understand it

Causes of the global financial crisisCauses of the global financial crisis

Wider causes:Wider causes:

Global imbalances implied huge flow of funds from Global imbalances implied huge flow of funds from developing countries (particularly Asia) to developed developing countries (particularly Asia) to developed countries (particularly US)countries (particularly US)

Low global interest rates, both structural and monetary Low global interest rates, both structural and monetary policy related, led to strongly rising asset pricespolicy related, led to strongly rising asset prices

Causes of the global financial crisisCauses of the global financial crisis

Wider causes:Wider causes:

Large banks, mainly in US, UK, and Europe, gradually Large banks, mainly in US, UK, and Europe, gradually became more highly leveraged (more loans for each became more highly leveraged (more loans for each dollar of bank assets). They did this because dollar of bank assets). They did this because

–– repeal of the US Glass-Steagall Act in 1999 allowed repeal of the US Glass-Steagall Act in 1999 allowed commercial banks to run large investment banking commercial banks to run large investment banking businessesbusinesses

–– regulatory frameworks encouraged banks to shift loans ‘off regulatory frameworks encouraged banks to shift loans ‘off balance sheet’balance sheet’

–– times were goodtimes were good

–– it was it was veryvery profitable: “while the music is playing, you have profitable: “while the music is playing, you have to get up and dance”to get up and dance”

Causes of the global financial crisisCauses of the global financial crisis

–– low global interest rates combined with investors low global interest rates combined with investors continuing expectation of high returns encouraged a continuing expectation of high returns encouraged a ‘search for yield’ ‘search for yield’

–– banks thought they had a better understanding of financial banks thought they had a better understanding of financial risks than ever before, based on sophisticated models of risks than ever before, based on sophisticated models of risk and returnrisk and return

:: the models were sophisticated but, as it turned out, also the models were sophisticated but, as it turned out, also fatally flawedfatally flawed

Inappropriate incentives in financial markets – too much Inappropriate incentives in financial markets – too much pay for short-term returns, not enough downside for pay for short-term returns, not enough downside for losseslosses

– incentive to take risks which generated good returns most incentive to take risks which generated good returns most of the time, but with a small probability of disasterof the time, but with a small probability of disaster

3-month LIBOR over OIS spreads3-month LIBOR over OIS spreads

Source: Thomson Reuters – Ecowin Database.

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

05-Jan-07 27-Jun-07 17-Dec-07 07-Jun-08 27-Nov-08 19-May-09

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

US$

Euro

UK£

A$

Per cent per annum Per cent per annum

European Government bond spreadsEuropean Government bond spreads(To 10-year German bunds)(To 10-year German bunds)

Source: Thomson Reuters.

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

May-99 May-00 May-01 May-02 May-03 May-04 May-05 May-06 May-07 May-08 May-09

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Greece France Spain Ireland Netherlands Portugal Italy

Per cent per annum Per cent per annum

IMF forecasts of 2009 GDP growthIMF forecasts of 2009 GDP growth

Note: March 2009 forecast is lower bound of IMF estimates. No G7 forecast was provided in the March update, so G3 forecast is used. Source: IMF.

G7 World

-4

-3

-2

-1

0

1

2

3

4

Apr-08 Jul-08 Oct-08 Nov-08 Jan-09 Mar-09 Apr-09

-4

-3

-2

-1

0

1

2

3

4Per cent Per cent

-4

-3

-2

-1

0

1

2

3

4

Apr-08 Jul-08 Oct-08 Nov-08 Jan-09 Mar-09 Apr-09

-4

-3

-2

-1

0

1

2

3

4Per cent Per cent

US – Housing indicatorsUS – Housing indicatorsHousing starts Total number of homes for sale

Source: US Census Bureau and National Association of Realtors.

0.0

0.5

1.0

1.5

2.0

2.5

Apr-89 Apr-94 Apr-99 Apr-04 Apr-09

0.0

0.5

1.0

1.5

2.0

2.5Millions Millions

1

2

3

4

5

6

Mar-89 Mar-94 Mar-99 Mar-04 Mar-09

1

2

3

4

5

6Millions Millions

`

US House pricesUS House prices

Source: S&P/Case-Shiller.

50

75

100

125

150

175

200

225

250

Feb-87 Feb-89 Feb-91 Feb-93 Feb-95 Feb-97 Feb-99 Feb-01 Feb-03 Feb-05 Feb-07 Feb-09

50

75

100

125

150

175

200

225

250Index (Feb-00=100) Index (Feb-00=100)

Case-Shiller 10-city index

United States – Unemployment rateUnited States – Unemployment rate

Source: Bureau of Labor Statistics.

2

4

6

8

10

12

Apr-80 Feb-85 Dec-89 Oct-94 Aug-99 Jun-04 Apr-09

2

4

6

8

10

12Per cent Per cent

Japan – Industrial production and exportsJapan – Industrial production and exportsIndustrial production Export volumes

Note: Industrial production is seasonally adjusted.Source: Ecowin and Treasury.

70

80

90

100

110

120

130

Mar-89 Mar-93 Mar-97 Mar-01 Mar-05 Mar-09

70

80

90

100

110

120

130Index (Mar-89=100) Index (Mar-89=100)

60

100

140

180

220

260

300

Mar-89 Mar-93 Mar-97 Mar-01 Mar-05 Mar-09

60

100

140

180

220

260

300Index (Mar-89=100) Index (Mar-89=100)

China – GDP growthChina – GDP growth

Note: Quarterly figures are Treasury estimates. GDP is on a production basis. Through-the-year data are in original terms.Source: CEIC China database and Treasury.

0

3

6

9

12

15

Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09

0

3

6

9

12

15

Through the year

Quarterly

Per cent Per cent

OECD output gapOECD output gap

Note: Estimates of potential output have not been revised and therefore do not incorporate the reduction in supply implied by the downturn. Not all countries had reported their December quarter 2008 GDP at the time of calculation.Source: OECD.

-10

-8

-6

-4

-2

0

2

4

6

Dec-70 Dec-75 Dec-80 Dec-85 Dec-90 Dec-95 Dec-00 Dec-05 Dec-10

-10

-8

-6

-4

-2

0

2

4

6Percentage of potential output Percentage of potential output

(f)

Global equity marketsGlobal equity markets

Source: Standard and Poor’s, Stoxx Ltd and ASX.

30

40

50

60

70

80

90

100

110

01-Jan-08 11-Apr-08 21-Jul-08 30-Oct-08 08-Feb-09 20-May-09

30

40

50

60

70

80

90

100

110

S&P 500 Eurostoxx 50 ASX 200

Index (1 Jan 08 = 100) Index (1 Jan 08 = 100)

World’s largest banks by credit ratingWorld’s largest banks by credit rating

10

100

1,000

10,000

AAA AA AA- A+ A A-

10

100

1,000

10,000

Australia's four largest banks

Total assets, $US billion, log scale Total assets, $US billion, log scale

Note: Data refer to bank ratings as at 1 May 2009 and assets as at late 2007 (latest available data).Source: Bloomberg and The Banker.

Banks: Market capitalisationBanks: Market capitalisation($US Billions)($US Billions)

Market value as at June Quarter 2007

Market value as at 19 May 2009

Source: JPMorgan and Bloomberg L.P.

Morgan Stanley Credit Suisse Deutsche Bank Barclays Goldman Sachs UBS

Santander RBS JP Morgan HSBC Citigroup

Thirty largest banks in the WorldThirty largest banks in the World

Note: Thirty largest banks by market capitalisation (excluding Chinese State Owned Entities e.g. ICBC). RBS is included for illustrative purposes, despite no longer being one of the top 30 largest banks globally. Market capitalisation is translated into U.S. dollars using relevant exchange rate as at 13-Feb-09.Source: Reuters (as at 13-Feb-09).

HS

BC

JPM

org

an

Wel

ls F

arg

o

San

tan

der

Cre

dit

Su

isse

Mit

sub

ish

i UF

J

Go

ldm

an S

ach

s

UB

S

Inte

sa S

anp

aolo

Wes

tpac

BN

P P

arib

as

Co

mm

on

wea

lth

Ban

k

RB

C

Ban

co B

rad

esco

Ban

k o

f A

mer

ica

Ban

k o

f N

ew Y

ork

Su

mit

om

o M

itsu

i

Miz

uh

o F

inan

cial

Mo

rgan

Sta

nle

y

Nat

ion

al A

ust

ralia

Un

icre

dit

To

ron

to-D

om

inio

n

U.S

.Ban

corp

Cre

dit

Ag

rico

le

Cit

igro

up

So

ciet

e G

ener

ale

AN

Z

Deu

tsch

e B

ank

Bar

clay

s

RB

S

100

90

80

70

60

50

40

30

20

10

0

MA

RK

ET

CA

PIT

AL

ISA

TIO

N (

US

$m)

Banks’ share pricesBanks’ share prices

Source: Bloomberg.

0

20

40

60

80

100

120

02 Jul 07 21 Dec 07 10 Jun 08 29 Nov 08 20 May 09

0

20

40

60

80

100

120Index (2 Jul 07=100) Index (2 Jul 07=100)

0

20

40

60

80

100

120

02 Jul 07 21 Dec 07 10 Jun 08 29 Nov 08 20 May 09

0

20

40

60

80

100

120

Australia

US

JapanUK

Index (2 Jul 07=100) Index (2 Jul 07=100)

House pricesHouse prices

Source: S&P/Case-Shiller, Australian Property Monitors and Treasury.

80

120

160

200

240

280

320

Mar-95 Mar-97 Mar-99 Mar-01 Mar-03 Mar-05 Mar-07 Mar-09

80

120

160

200

240

280

320Index (Mar-95=100) Index (Mar-95=100)

Australia(6 capital city weighted average)

United States(Case-Shiller 10-city index)

Bulk commodity pricesBulk commodity pricesIron ore Thermal coal

(Newcastle)

Note: Iron ore spot price is CFR for India/China imports.Source: Bloomberg, Global Coal and ABARE.

20

50

80

110

140

170

200

230

May-05 May-06 May-07 May-08 May-09

20

50

80

110

140

170

200

230

Spot price Contract price

$US/t $US/t

20

50

80

110

140

170

200

230

Jan-04 May-05 Sep-06 Jan-08 May-09

20

50

80

110

140

170

200

230

Spot price Contract price

$US/t $US/t

RBA Cash rateRBA Cash rate

0

4

8

12

16

20

24

May-87 May-89 May-91 May-93 May-95 May-97 May-99 May-01 May-03 May-05 May-07 May-09

0

4

8

12

16

20

24Per cent Per cent

Note: Data to Dec-89 are the 11am call rate. Data from Jan-90 are the target cash rate.Source: Reserve Bank of Australia.

Australian Government fiscal stimulusAustralian Government fiscal stimulus

Source: Treasury.

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2nd Half2008

1st Half2009

2nd Half2009

1st Half2010

2nd Half2010

1st Half2011

2nd Half2011

1st Half2012

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

Transfers COAG reforms Investment

Per cent of annual GDP Per cent of annual GDP

Real GDPReal GDP(estimated effect of fiscal stimulus)(estimated effect of fiscal stimulus)

95

96

97

98

99

100

101

102

103

Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11

95

96

97

98

99

100

101

102

103

Pre-stimulus

Post-stimulus

Forecasts

Index (Sep-08=100) Index (Sep-08=100)

Source: ABS Catalogue Number 5206.0 and Treasury.

Australian GovernmentAustralian Government

Source: Treasury.

Payments and receipts

Underlying cash balance

20

22

24

26

28

30

1977-78 1982-83 1987-88 1992-93 1997-98 2002-03 2007-08 2012-13

20

22

24

26

28

30

Receipts

Payments (f) (p)

Per cent of GDP Per cent of GDP

-6

-4

-2

0

2

4

1977-78 1982-83 1987-88 1992-93 1997-98 2002-03 2007-08 2012-13

-6

-4

-2

0

2

4(f) (p)

Per cent of GDP Per cent of GDP

Government net debt position Government net debt position for selected countriesfor selected countries

Note: Data are general government net debt, except for Australia which are Australian Government debt. Data are as at end of calendar year, except for Australia and the UK where data refer to financial years beginning 2008-09. UK data for 2014 refer to financial year 2013-14.Source: IMF, HM Treasury and Treasury.

-20

0

20

40

60

80

100

120

140

Australia Canada UK US Advanced 25 Euro area Japan

-20

0

20

40

60

80

100

120

140

2008 2009 2010 2014

Per cent of GDP Per cent of GDP

Private consumptionPrivate consumption(Nominal)(Nominal)

Source: ABS Catalogue Number 5206.0, US Bureau of Economic Analysis and Office of National Statistics, UK.

50

55

60

65

70

75

Mar-79 Mar-82 Mar-85 Mar-88 Mar-91 Mar-94 Mar-97 Mar-00 Mar-03 Mar-06 Mar-09

50

55

60

65

70

75Per cent of GDP Per cent of GDP

US

UK

Australia

The Australian economy – The Australian economy – Staying afloat in the global stormStaying afloat in the global storm

David GruenDavid GruenTuesday, 26 May 2009Tuesday, 26 May 2009